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Wells Fargo & Co. just settled a lawsuit alleging that the
San Francisco financial services firm targeted African-American
borrowers for predatory lending in Memphis and Shelby County. The
development, which isn’t the only one of its kind, warns of a
disregard for fairness that can also impact investors.

Memphis and Shelby had filed a claim in December 2009, alleging
that 43.2% of Wells Fargo’s foreclosures were in predominantly
African-American neighborhoods while only 21.5% were in
predominantly white neighborhoods. At the same time Wells Fargo
had allegedly granted the majority of its loans to whites. The
claim also alleged things such as the drafting of marketing
materials for the lowest quality mortgages in what the bank had
defined as African-American language.

Wells Fargo promised to make $425 million in mortgages available
to Memphis and Shelby residents within the next five years,
nearly a third of which shall go to low- and moderate-income
borrowers. It will also invest $7.5 million toward helping the
neighborhoods recover from the housing crisis by providing grants
for things such as home renovations, down payments, and financial
literacy programs. “We agreed that it was in the best interests
of everyone involved to work together rather than to continue to
be involved in a protracted legal fight,” said Leigh Collier,
Wells Fargo regional president for the Mid-South, in a statement
Tuesday.

To give credit where it’s due, Wells Fargo has put some effort
toward battling racism. For example, CEO John Stumpf says on the
company’s website that diversity allows his firm to better serve
the needs of its diverse customers, which in turn leads to more
value for stockholders. Wells Fargo has also established groups
such as its Enterprise Diversity Council, whose tasks include
creating strategies for earning more business from minorities and
making recommendations for the development of staff. With more
than a third of his team consisting of minorities and 59% of it
women, Stumpf has to treat them fairly in order to lead a ship
with a fully willing, loyal and effective crew.

Yet Wells Fargo’s obvious incentive to give its staff and
customers equal rights hasn’t spared it from other lawsuits
involving minorities. In July 2009 Illinois Attorney General Lisa
Madigan sued Wells Fargo for allegedly targeting African-American
and Latino borrowers for sales of the lender’s poorest quality
and most expensive mortgages. In April 2011 the Securities and
Exchange Commission fined Wells Fargo Securities L.L.C.,
formerly known as Wachovia Capital Markets L.L.C., more than $11
million for charging undisclosed excessive markups in the sale of
a collateralized debt obligation-related investment to the Zuni
Indian Tribe and an individual investor. And this April the
National Fair Housing Alliance said it filed a federal housing
discrimination complaint against Wells Fargo, alleging the bank
maintained and marketed foreclosed properties in white areas much
better than those in neighborhoods of color.

The recent lawsuits against Wells Fargo are one red flag among
various others that contribute to an F on the firm’s corporate
governance. Its financial statements reflect an AGR score of 6, indicating higher risk than
94% of companies. That’s an improvement from an AGR of 1 in June
2010.

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CEO Stumpf said on Wells Fargo’s website that the firm’s progress
on its “vision and values” has not been perfect. He also said
companies are made up of human beings. They make mistakes, admit
them, learn from them, and then keep moving forward with even
more understanding. “We learn just as much from failure
(perhaps more) as we do from success,” he said.

Given that exemplary attitude, it’s interesting that Wells Fargo
continues to deny the allegations Memphis and Shelby made. The
company could indeed be innocent, but by settling and avoiding a
protracted set of questions, they gave up their golden
opportunity to learn whether the court also agrees.